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article 11 Jan 2019

Standard Essential Patents - Part 1

Magazine Fortify published a long read on Standard Essential Patents. The article consists of an interview with a representative of the European Commission and a partner of NLO. The article will be split in three parts, this is part one; an introduction to SEPs and FRAND.

Introduction to SEPs and FRAND

Granting a patent holder exclusive, albeit temporary, rights to a technology may seem strange in a society that adheres to the principles of capitalism and free markets. In fields such as telecommunications, therefore, where devices from competing manufacturers have to adhere to a common standard in order to communicate, it has long been recognized that patentees’ rights have to be balanced against other interests.

After all, someone holding a patent on a small but essential part of a standard has in principle the power to prevent anyone else from applying that patent and thus from deploying the standard. The fact that there are thousands of patents on a telecom standard, and dozens if not hundreds of sometimes major patent holders, means there is a real possibility that, from a legal perspective, standardized technology could become completely deadlocked.

In order to prevent companies from blocking each other from applying key parts of a standard, and so creating deadlock across the entire telecom market, standards-setting bodies such as the European Telecommunications Standards Institute (ETSI) require holders of patents on standards administered by that body to announce their patents and to offer licences to other parties on Fair, Reasonable and Non-Discriminatory (FRAND) conditions.

In other words, if you have a patent (a ‘Standard Essential Patent’ or ‘SEP’) on part of a telecom standard, you have the advantage of easily being able to prove whether others are infringing your patent. You just need to check whether the competing product claims to adhere to the relevant standard. The disadvantage, however, is that you have slightly less freedom to enforce that patent than under a ‘normal’, non-standard-related patent. In the case of an SEP, for example, you cannot choose to license the patent to affiliated companies at low royalty rates, while simultaneously refusing a licence to competitors or charging them absurdly high royalties. That would neither be fair nor reasonable, and would also be discriminatory.

 

Case law slowly developing

While the above example of a FRAND violation is relatively clear-cut, many questions can arise in practice. There is not yet, for instance, a standard way to determine whether specific licensing conditions are FRAND, while only limited guidance is available on the efforts that parties must undertake to agree a FRAND licence deal before starting litigation.

In 2015, the Court of Justice of the European Union (CJEU) shed some light on SEPs and FRAND conditions in the Huawei v. ZTE judgment by specifically putting the onus on the patentee to at least offer a licence under FRAND conditions before being allowed to obtain an injunction against an infringer of an SEP. However, this clarification, while welcome, did not define what is meant by FRAND conditions.

In 2017, the English High Court outlined a way, in the Unwired v. Huawei judgment, to calculate FRAND royalty rates. Whether this judgment will continue to stand remains to be seen as while appeals have been filed, it is unclear, against the background of Brexit, whether these appeals will ultimately end up at the CJEU.

 

Proliferation of standard-based technology

Coming back to the original topic, we can see how SEPs have become increasingly important in recent years. This has everything to do with the development and deployment of new communications-enabled technology, also referred to as the ‘Internet of Things’ (IoT). Whether it is a smart fridge with internet connectivity, a car communicating with other road users to share data, or a healthcare device uploading medical data to a doctor’s computer, standard-based technology is invading all fields of technology, and the importance of SEPs now, therefore, extends far beyond their original area of mobile phones.

 

This article was written in August 2018 and published in Fortify #7, Winter 2018/2019.